Today we’re going to do a run down of one of the best tools I’ve ever found to help you along your Financial Independence Retire Early journey.
So most of us who have stumbled upon the FIRE community have also heard of the “Trinity Study” and more commonly known “the 4% rule” right? If you’re completely unaware of these terms I will give you a little rundown before we get into the meat and potatoes of this post.
The 4% basically states that if you’ve got a nest egg of a given amount, lets say $1,000,000 for simplicity, and you intend to live off 4% of that per year or $40,000 per year (and increase for inflation) then you should with a high likelihood be able to live off your nest egg for 30+ years and essentially be retired at this point.
Now- there are some issues with this concept as the math runs many many scenarios dating back in the stock markets history and it does come up with scenarios where based on the timing of market crashes and overall market returns you may run out of money. This is the biggest fear of any retiree, especially someone who’s looking to retire in say their 30’s or 40’s and drag out an even longer than average retirement where they need these funds.
What this tool aims to do is give you feedback on what your odds are of having a successful retirement fund while giving you some freedom to adjust spending and adapt to changing market conditions and account for these changes.
Lets have a look at what I’m talking about below with this table from
https://engaging-data.com/will-money-last-retire-early/
While most of the inputs are fairly clearly labeled I’ll explain a few here.
Spending Flexibility %: If the market were having trouble this is the amount you would be comfortable changing your spending to adapt for this in order to get by and preserve your nest egg ie. 10% means you could cut back $4,000 in a bad year and live off $36,000
Extra Income: The extra income is any side hustles or additional incomes you plan to receive after retiring and the start and end age below that are the years in which you’d expect to make this income.
So let us analyze the above scenario of a $1,000,000 portfolio supporting a $40,000 lifestyle for 50 years of retirement with a spending flexibility of 10% and no side hustles.
What the table is showing us is first of all how is how important it might be for us all to unlock some form of fire as that grey shaded area are the odds of us not running out of money but running out of time (deceased).
That red sliver above it? That’s the odds of us going broke in retirement – in this case it’s a little over 1% likelihood, really not that bad when you figure there’s a 100% chance of running out of time in retirement.
The varying stages of green are us retiring with money, either less than we started with, a little more than we started with and as it gets darker green having multiple times what we started with in retirement.
So if you are one of those people who wants to be rock solid on your current plans for FIRE its definitely worth running some numbers by this tool and seeing how realistic your goals are and what adjustments you may need to make to get it to a point where you’re comfortable with the outcomes.
That’s all I’ve got to say on this tool for the time being, I hope we’ve been able to unlock a new resource for our followers to help them through their financial independence journeys. As always, these tools are used to supplement your FIRE journey and always seek advice from a professional before you make any adjustments to your financial plans. If you have any questions, concerns or would like a more thorough walk through of this tool please feel free to contact us and we’ll be sure to get back to you.
Thanks for stopping by,
FIC.